Summary of “Business Valuation—CRA and Professional Advisor Perspectives”, a presentation given by Mark DeMarco, Team Leader, Business Equity Valuations Unit, Toronto Regional Valuations Unit, to a workshop held by The Canadian Institute of Chartered Business Valuators in Toronto on December 2, 2015.
• Valuation methodologies and procedures are not mandated
• National valuation policy directives are kept to a minimum
• Valuations headquarters does not take ownership of valuation issues
• CRA Valuators in Toronto Centre and across the country are expected to resist undue influence by referring auditors
• Since the Business Valuations Unit is not an assessing section, we do not engage with taxpayers over assessing positions or the applicability of one section of the ITA with another
• Valuators do not negotiate FMV. If additional information not previously considered becomes available, we may revisit the valuation
• We routinely review related party transactions (presumption is they are not at arm’s length)
• But we sometimes review unrelated party transactions
One slide deals with “Sections of the Income Tax Act with Valuation Issues”. Section 56.4 is conspicuous by its absence.
In a list of “typical referrals” (ie a list of types of valuations undertaken by the valuations unit), restrictive covenants are not mentioned (but “FMV allocation of purchase price in arm’s length situations” is). The list does include “estimates of a reasonable rate of interest” and “FMV of stock option compensation (either to employees or to consultants.”
• Many tax practitioners are advising their clients to transfer professional goodwill through a s.85 rollover into a related entity
• In some cases the fair market value of the goodwill may be challenged on the basis that it is personal in nature
• Personal goodwill (sometimes called “professional goodwill”) is not considered transferable and consequently it has little or no commercial value (it cannot be sold)
Regarding stock options:
• It is not acceptable to use the intrinsic method to value stock options (not consistent with definition of FMV) (ITA, s. 7 rules)
• Assigning zero value to “out-of-the money stock options or warrants”. This is not fair market value
• Intrinsic method overlooks the time value of the option or warrant
Regarding the valuation of the shares of a corporation:
• When valuing a holding company, we will always consider the effect of corporate taxes on the fair market value of a holding company
• However, we are not always inclined to consider income taxes at the personal level when determining the fair market value of a holding company
• We have taken the position that this represents “Value to Owner” which is a very different concept from “Fair Market Value”
• Generally where opportunities are available to defer or sidestep either personal or corporate taxes, we would presume that a rational and prudent party would take advantage of those opportunities
